Which of the following statements is true?
A)One advantage of using MPT for loans is that the returns on individual loans are normally distributed, meaning that the upside returns are equal to the downside risks.
B)One objection to using MPT for loans is that the returns on individual loans are not normally distributed, meaning that most loans have unlimited upside returns and long-tail downside risks.
C)One advantage of using MPT for loans is that the returns on individual loans are normally distributed, meaning that most loans have unlimited upside returns and unlimited downside risks.
D)One objection to using MPT for loans is that the returns on individual loans are not normally distributed, meaning that most loans have limited upside returns and long-tail downside risks.

Question

Quizplus · Accepted Answer

Modern Portfolio Theory (MPT) assumes returns are normally distributed, but the objection to using MPT for loans is that loan returns are not normally distributed. Instead, they have limited upside (since the best outcome is the loan being repaid with interest) and potentially significant downside risks (e.g., default), which is not captured well by normal distribution assumptions.

Which of the Following Statements Is True